How the environmental credit evaluation system affects corporate pollution emissions: Evidence from China

The environmental credit evaluation system (ECES), which integrates control, market, and contractual elements as a novel comprehensive environmental regulation tool, has been piloted in China since the late 1990s. The effectiveness of this system in improving environmental conditions and the mechanisms through which it operates have attracted significant attention. This study utilizes the pilot implementation of the ECES as a quasi-natural experiment, integrating data from Chinese industrial firms and pollution statistics from 2003 to 2014. Employing a difference-in-differences approach with multiple time points, we conduct an empirical assessment of the ECES's impact on pollution reduction. The results indicate that the ECES effectively curtails corporate pollution emissions. Heterogeneity analysis reveals that the pollution reduction effects are more pronounced in state-owned firms, large-scale firms, and in regions with stringent environmental regulations and high public environmental awareness. Mechanism testing demonstrates that the ECES mitigates pollution emissions primarily by alleviating financing constraints and promoting positive environmental behaviors. In terms of proactive pollution prevention and end-of-pipe treatment, the latter is more significantly influenced by the incentives provided by the ECES. Further analysis indicates that specific features of the ECES, such as mandatory participation and the establishment of credit ratings, are particularly conducive to enhancing its pollution reduction efficacy. The conclusions drawn from this study reinforce the micro-foundations of the ECES and offer insightful recommendations for its refinement and for promoting synergistic development between environmental and economic objectives. •We evaluate the environmental effects of the ECES using corporate pollution data to accurately assess its impacts.•We reveal ECES's emission reduction mechanisms through financing constraints and eco-friendly behaviors.•We analyze impacts of mandatory versus voluntary ECES participation, improving the precision of policy implementation.•This study uncovers the mechanisms and boundaries of ECES, providing insights for refining pollution control strategies.